UK & Europe
Insurance & Reinsurance
The Supreme Court has overturned a High Court decision in which Travelers was ordered to pay the costs of 426 uninsured Claimants, pursuant to a non-party costs order, under section 51 of the Senior Courts Act 1981. The judgment provides much needed guidance on insurers' potential costs liability in relation to wholly or partly uninsured claims.
Claimants in a group litigation action alleged that they had been supplied with defective breast implants and brought claims against several defendants, including Transform Medical Group (CS) Limited ("Transform") - a clinic which fitted defective implants in England.
The litigation included claims in relation to implants which had ruptured, as well as implants at risk of rupturing.
Travelers – Transform's liability insurers, advised that Transform's policy did not respond to claims presented by the "worried well". The claims regarding the un-ruptured implants, as well as a number of claims which fell outside the relevant policy period, were therefore uninsured.
Notwithstanding the coverage position, Travelers agreed to fund Transform's defence. It did not disclose the fact that a large number of the claims were uninsured until a relatively late stage in proceedings. The insured claims subsequently settled.
The uninsured Claimants won at trial. However, by this time, Transform has entered administration. Consequently, the uninsured Claimants applied for a non-party costs order against Travelers.
When considering the application, the High Court placed little emphasis on previous case law, focussing its analysis on: (1) whether the case was "exceptional"; and, (2) whether the making of an order would accord with the principles of fairness and justice.
In assessing those criteria, the High Court was strongly influenced by:
"The fact that [Travelers] insured other claims did not entitle it to be involved in, still less influence, the conduct of the uninsured claims, both of which it did."
But for Travelers' involvement, Transform would likely have disclosed that the "worried well" claims were uninsured, at a much earlier stage, giving the uninsured Claimants the opportunity to discontinue before significant costs had been incurred.
The High Court also had regard to the fact that:
If the uninsured Claimants had lost, they would have been liable to pay Transform's costs.
Travelers would be paying "what they bargained for under the contract of insurance".
Travelers appealed to the Court of Appeal, arguing that previous case law established that a non-party costs order could not be made unless the insurer had controlled litigation in its own interest, without proper consideration for the insured's interests.
The Court of Appeal concluded that the High Court had gone too far in stating that Travelers did not have a legitimate interest in the uninsured claims as there were a number of common issues between the insured and uninsured claims.
The Court of Appeal, nevertheless, upheld the High Court's decision, stating that courts enjoyed a broad discretion with regard to section 51 and that previous case law did not impose prescriptive rules. Orders under section 51 should, instead, be regarded as applying in "exceptional" circumstances and "asymmetry" or "lack of reciprocity" on costs risk, was a key factor.
Travelers appealed to the Supreme Court, arguing that the Court of Appeal had wrongly departed from the relevant case law, exposing Travelers to "unexpected and unforeseeable liability" in circumstances where its conduct had "not departed from the acceptable norm in a way that could property be described as exceptional". Travelers also argued that a perceived lack of reciprocity in relation to costs liability was not unusual, nor a proper justification for imposing a non-party costs order pursuant to section 51.
The Supreme Court reviewed the relevant authorities and stated that there were two approaches to deciding whether a non-party should pay costs:
Did the non-party take control of the litigation and become "the real defendant"; and,
Did the non-party engage in "unjustified intermeddling".
The Court of Appeal held that the "real defendant" test was inappropriate in a case in which the claimants were uninsured. In such circumstances, the Court should focus on whether the insurer engaged in "unjustified meddling".
Before the High Court, the uninsured Claimants had criticised several aspects of Travelers' conduct however, that conduct did not amount to unjustified intermeddling:
Non-disclosure of the limits of cover: parties to litigation are not obliged to disclose their insurance arrangements. In advising the insured not to disclose its insurance position, solicitors for Travelers and Transform had simply protected Travelers' position in relation to the insured claims.
Offers and admissions: by 2015, the uninsured Claimants were determined to pursue their claims to trial. An offer of settlement which did not include the payment of costs would not, therefore, have made a difference to the outcome.
Asymmetry of risk: although the Court of Appeal was concerned by the fact that the uninsured Claimants faced not being able to recover their costs, Travelers were not to blame - the asymmetry resulted from Transform's insolvency and the fact that the uninsured Claimants' liability was several only.
For these reasons, the Supreme Court held that the High Court was wrong to impose a non- party costs order on Travelers.
In cases which are partly insured and partly uninsured, liability insurers face the invidious decision of whether to fund all or part of their insured's defence. Too little funding attracts criticism from the insured; too much funding risks an order under section 51 that the insurer should pay the claimants' costs even in respect of the uninsured component of the loss.
This decision clarifies the principles underpinning section 51. The courts have considerable discretion under section 51 and their assessment in each case will be highly fact-specific. Notwithstanding, insurers should take comfort that a section 51 order is not the automatic consequence of an insurer's decision to support a liability defence. On the contrary, the courts should make a proportionate and principled assessment of the extent to which the insurer has 'unjustifiably intermeddled'. Only if that conclusion is reached should the court proceed to make an order.